The UK's biggest water company paid no corporation tax and received £5 million credit from the Treasury during a year in which revenues rose to £1.8 billion. Thames Water made £549 million in underlying pre-tax profits as it hiked bills by an inflation-busting 6.7%, while customer satisfaction dipped and hundreds saw their homes flooded by sewage.

The figures come in the wake of criticism by Jonson Cox, chairman of regulator Ofwat, that the high profits and tax-reducing corporate structures of some water companies were "morally questionable". Thames Water's profit for the year to the end of March was a 9% fall on last year, blamed on the freezing weather and rising levels of bad debt during the economic downturn.

But chief executive Martin Baggs still received a pay rise to £450,000 plus a £274,000 bonus. Next month he is in line to collect a further £366,000 as part of a long-term incentive plan. Thames Water is owned by Kemble Water Holdings, whose main investors are ultimately controlled by the Australian-based Macquarie Group.

Baggs enjoyed a large pay rise

Thames says its taxable profits are reduced by allowances on its £1 billion-a-year investment programme. Remaining gains are offset by tax losses claimed from other members of the group. It also said the combined bill for business rates and employee income tax and national insurance and other taxes was £150 million, while spending with suppliers and contractors boosted the wider economy.

But its admission that it did not pay any corporation tax comes in the wake of comments by Mr Cox, who questioned the use by some water companies of structures to reduce their tax liabilities in a Daily Telegraph article. He wrote: "Tax policy is not for an economic regulator and these structures may be legal and common in private equity. But some aspects are morally questionable in a vital public service."

Thames Water said dividends for the year have been cut from £280 million to £231 million and there was no payout to shareholders of Kemble for the second part of the year. Much of Thames Water's income was spent on servicing huge debts, with interest payments of over £400 million over the year as borrowings increased from £7.8 billion to £8.4 billion.

Revenues at the utility giant, which serves 14 million customers, rose 5.7% from £1.7 billion to £1.8 billion. It reflected a 6.7% rise in regulated bills, though metered consumption was £9.5 million lower. In the current financial year, customers will face another inflation busting rise, of 5.5%. The company said this was needed for investment in infrastructure and services.

However, Thames admitted its performance was not good enough, as Ofwat surveys showed customer satisfaction dipped over the year. It blamed the introduction of a new IT system together with the impact of heavy rainfall. During the year, nine million customers in London and the Thames Valley faced water restrictions, while repeat sewer flooding incidents increased from 355 to 549, again blamed on the weather.

Mr Baggs said: "We recognise, however, that regardless of these exceptional circumstances, we have not always provided the best service to our customers." Thames Water saw leakage of 646 million litres a day, up from 637 million litres, blamed on the colder weather, though it met targets on repairs and replacement of old pipes.

Figures for ensuring customers were not cut off were also slightly down and water quality, though high, also fell back by a small degree. Mr Baggs said: "Over the past financial year exceptional weather conditions have presented tough challenges for the business. The period began with a drought, following the driest two-year period on record, and ended with widespread flooding after becoming England's rainiest 12 months on record. Despite these challenges we have for the third year running carried out a further £1 billion of improvements to our networks, while the average household bill in our region is the second-lowest in the country."

Dave Prentis, general secretary of public sector union Unison, said: "This is a disgrace. Since privatisation, water companies have been ripping off consumers, pushing bills up much higher than inflation. Now we know they are ripping off the taxpayer too. "It is time for the Government to think again about who owns the water industry. The current private monopoly is the worst of both worlds. We need a root and branch review to make sure the industry is run in the interests of consumers not profits."

A Thames Water spokesman said: "We have not paid much corporation tax in recent years because the Government's tax system allows us to delay, not avoid, payment of tax based on how much we invest. Because we are investing £1 billion a year from 2010 to 2015, more than any water firm in the UK's history, we are able to defer a lot of tax payments to future years. The HMRC tax mechanism is called the capital allowance. Its aim is to encourage firms like us to carry out early and extensive infrastructure investment.

They added: "If capital allowances did not exist it would mean one of two things: customers' bills would be higher, or Thames Water would invest less. As things stand we invest record amounts while our customers' bills remain the second-lowest in the sector, at less than £1 a day."